Do You Know How Much You're Worth?

how much you owe

The second step requires that you calculate the value of all your liabilities (what you owe). Make sure you include the following categories in your list:

Mortgages This is usually the single greatest liability that many people have. Use the mortgage balance.

Secured Debt Any items that can be recuperated and resold by the lender, such as cars, trucks, motorcycles, boats, and business loans. Use the loan balance.

Unsecured Debt Personal loans such as student or renovation loans. But for many people, credit cards represent the greatest source of unsecured debt. Use loan or credit card balances.

Having listed all your assets and liabilities in steps 1 and 2, you are now able to complete your net worth calculation. Once you've tallied the numbers, you may either be pleasantly surprised or distinctly shocked.

Subtract your liabilities from your assets. If your assets are larger than your liabilities, you have a positive net worth. If your liabilities are larger than your assets, you have a negative net worth.

understanding the numbers

Seeing where you stand will help you work toward reaching a better financial picture. If you have a negative net worth, then you are "technically" bankrupt. If you have a positive net worth, it's a good sign that you're doing things right and are headed in the right direction. In either case, there will always be room for improvement.

Once you have an established value, use this figure as a benchmark to compare whether or not your situation is improving down the road — you should to be computing your net worth at least once a year.

Your net worth statement is the personal, human equivalent of a company's balance sheet. Just as a company prepares its balance sheet annually to check on its financial health, you should similarly prepare your net worth statement to ensure that your financial health improves over time.

give those numbers a boost

There are basically three things you can do to increase your net worth. The first two are completely within your control, while the third depends on the condition of markets and the expertise of your financial consultant.

2- Start early Powerful methods of increasing personal wealth, such as compound interest, only materialize with the passing of time. So use it to your advantage — start early.

3- Return on investment Keep tabs on the average return of your investments. If you notice that the average return is dropping, then maybe it is time to seek the advice of a financial planner. Or if you already have one, then consider shopping around.

Alternatively, if you find that you are overwhelmed with debt, then the first order of business should be to reduce that as quickly as possible. There are four basic guidelines to effectively lower your debt. They are:

a- Never agree to act as a guarantor for someone unless you have all the ready cash needed to repay a loan if he defaults.

b- If you can delay making payments on any loan at all, do so on the one with the lowest interest rate (pay off the loan with the highest interest rate first).

c- If some loans are only subject to minimum payments, then always try and pay as much as possible on the smallest loan.

d- Sell any assets that you no longer use or can live without, and use the proceeds to reduce your debt. Use this strategy as a last resort.

As your debt situation eases, more and more money will be freed up to improve your cash flow situation and increase your net worth. The correct management of cash flow is what will ultimately lead you to financial freedom and prosperity.